Archives for October 2018

Exxon’s has supported carbon pricing — at least theoretically — by donating $1 million to Americans for Carbon Dividends,the political action committee of the Climate Leadership Council (CLC).

This It begs the question: what impact for Exxon, the world’s largest oil company?

Exxon owns or has a financial interest in65 million tonnes per year of LNG liquefaction capacity. That’s about 18% of the LNG industry’s worldwide capacity of 369 million tonnes.

Regasified and combusted, those 65 million tonnes of LNG can generate the equivalent of about 940 million megawatt-hours (or 940 Twh) of electricity, or about four percent of global electricity consumption.

Those 65 million tonnes of LNG also will create 9.4 million tonnes of life-cycle carbon emissions based upon 0.65-0.7 tonnes of carbon emissions per mwh generated, using figures from the US Department of Energy. That’s about two percent of global emissions.

LNG Life Cycle Greenhouse Gas Emissions

The US Department of Energy estimates life-cycle emissions of natural gas shipped to
market as LNG as only marginally lower than coal.Source: “Life Cycle Greenhouse Gas Perspective On Exporting Liquefied
Natural Gas From the United States, 2014,” US Department of Energy

If recouped downstream from electricity consumers, a $40 carbon levy on LNG-produced electricity would add 3c/kwh to Japanese and South Korean electricity prices, 4c to German ones and 1c to those in China and India.

Price Effects On Electricity of a $40 Carbon Price

In the developed import economies of Europe, Japan, the UK, South Korea and Australia (which is considering, crazily enough, exporting LNG intra-country to itself — but that’s another story!), It would raise electricity prices by 13-15%.

In China, South Korea and India, the effect of $40 carbon prices would raise electricity prices 15-20%.

Such levies also would provide cost-effective funding of virtually all forms of low emission energy production short of carbon capture and storage, far and away the highest-cost carbon emission reduction technology there is.

Exxon, of course, may just be paying lip service to carbon taxes because it faces potential existential damage from climate lawsuits in the future. Or it may be seeking to soften up public opinion before cutting a deal to free itself from decades of future litigation due to its history as a major legacy carbon emitter and long-time global warming disinformation vector.

A new and contrite Exxon, however, looks an odd fit — at least right now. Over time, it will take a lot of convincing of the public that the company truly has changed.

As a short-lived Secretary of State under Donald Trump, former Exxon Rex Tillerson made reasonable statements about climate change. But Tillerson also made other statements casting doubt on it, leaving his real views unclear.

Exxon itself, of course, has a history of misleading the public on climate change, academics claim. It’s corporate history also suggests, at best, a tin ear or blind eye. The example below is a beauty.

In 1962, Exxon’s predecessor Humble Oil bragged in full page advertisement in Life Magazine about its energy’s ability to melt glaciers.

Glacier Melting our Specialty!

In 1962, Exxon precursor Humble Oil took out a two-page advertisement in Life Magazine bragging about
melting glaciersSource: Think Progress

Despite all the above, Exxon may be spurring important debate. That’s to be welcomed. And it’s a good first step.

A good second step would be to make donations to climate change research organizations and activists going forward commensurate with its past expenditures on sowing doubt on global warming.

It also creates a gusher of money for recycling into the global economy. This can pay for new technology and upgraded infrastructure, as well as to reducing government debt, meeting the rising costs of aging populations and funding better education and health care.

All of those, in turn, will generate their own positive externalities over time. In short, forcing dramatic change in the fossil fuel industry through proper taxation is highly profitable over the short-, medium and long term. Best of all the biggest elephant in the industry, Exxon, agrees.

Over the short term, higher carbon prices reduce negative behavior. This includes unfettered use of high emission energy.

Over the medium term, higher carbon prices will lead to more economic activity as the carbon tax funds are invested in new and societally beneficial growth industries rather than being sucked up by fossil fuel industry rent seeking.

Over the long term, the investments will generate ever larger environmental, social and economic dividends as their benefits compound.

Therefore, instead of seeing climate change as a problem, climate change needs to be seen (correctly) as the mother of all opportunities to change a pile of bad habits and make the world a much better place.

The above will be self-evidently obvious to all but those in the fossil fuel industry.

In the United States, profligate fiscal policy (including heaps of unwarranted subsidies to oil, gas and coal) are swelling the US debt-to-GDP ratio toward 100%.

This is occurring as an aging population is putting strain on medical facilities, while underfunded Social Security will go broke. Who comes first: fossil fuel interests, or people?

Carbon prices can help solve the problem, with money left over for investment in new technologies that in turn spur their own economic growth.

These result: the the next batch of Microsofts, Amazons, Apples and Googles. These will enrich investors.

With this amazing cornucopia of benefits, it often becomes hard to understand why there even exists opposition to higher carbon pricing. The only beneficiaries of the status quo are fossil fuel companies.

Another benefit of using carbon pricing to reduce emissions is that it helps the insurance industry. The increasing pace of climate disasters is costing the industry immensely.

If it keeps up, it will strain social stability.

Natural disasters made 2017 a year of record insurance losses.Source: Munich Re

The first is a cleansing financial crisis sometime before 2030. The second is destructive civilizational breakdown sometime around 2040.

The reason? LNG’s ‘life-cycle’ emissions are only slightly less than coal. The LNG industry needs to be forced into transparency on the issue.

To avoid catastrophic global warming, the world must to move quickly to low emission energy.

That means reducing the carbon emissions per megawatt-hour (for instance) from 0.8-0.9 tonnes per megawatt-hour (coal) to below 0.4 (ie wind and solar).

LNG lies in the ‘simply not good enough’ middle at 0.6-0.8+.

LNG Life Cycle Greenhouse Gas Emissions

The US Department of Energy estimates life-cycle emissions of natural gas shipped to market as LNG as only marginally lower than coal.Source: “Life Cycle Greenhouse Gas Perspective On Exporting Liquefied Natural Gas From the United States, 2014,” US Department of Energy

Further, LNG requires hundreds of billions of dollars of environmentally damaging infrastructure that’s only economic with long-term lock in. And that’s what the industry has done — to the detriment of everyone.

To avoid this train wreck, Liquid Natural Gas’ life-cycle carbon emissions need to be disclosed, priced and levied. That way they will compete on a level playing field against renewable energy and storage.

The first step along this path is proper carbon pricing.

Carbon Prices Needed for A Sustainable Future

Weighted global carbon prices linger around $1.3 per tonne. Traded prices range from around $3 to $20. European reforms aim for $20+ by 2020. Experts estimate $40 now and $100+ later are what’s needed.
Sources: High-Level Commission on Carbon Prices, US General Accounting Office, Exxon, Baker-Shultz Carbon Tax plan, International Energy Agency, state of California, European Union Emissions Trading Scheme.

At present, traded prices languish below $20 per tonne and some below $10. Major reforms are planned for 2020 and beyond. At the high end, the High-Level Commission on Carbon Prices argues $100 carbon is needed by the early 2020s. The US General Accounting agrees on the $100 figure, but around 2030. Even Exxon uses hypothetical future prices of $80.

Such prices need to be ‘fitted’ to historical price data and incorporated into future price expectations.

Using Henry Hub natural gas price data from 1997, and applying nominal $5 carbon prices to that, rising at 5% per year to $40 now (the social cost) and rising to $70 by 2050 (an unambitious number), it indicates a future cost of ~$5 per mwh by 2033 at a time when wind and solar are falling steeply and by then will be cheaper.

And what all that points to is increasing uncompetitiveness for LNG with its high sunk costs. The solution is for these companies to go bankrupt due to their bad bets. Their shareholders can take the hit. That’s market economics.

This will limit the broader damage to society, since shareholders were willing participants in a losing industry. The other alternative is to spread the losses widely through an aggressive expansion of the LNG industry. But that disproportionately favors LNG industry insiders to the detriment of everyone else.

Effect of Rising Carbon Prices on Natural Gas Trade

Applying $5 per tonne carbon prices rising at 5% per year to Henry Hub natural gas prices provides a clearer picture of the true environmental economics of the international Liquid Natural gas trade as carbon prices move to $70 and above by the late 2020s. As LNG becomes priced out of the market, collected carbon levies can fund investment in clean energy.Sources: Henry Hub Prices, US Energy Information Administration;“Renewable Power Generation Costs 2017’” International Renewable Energy Agency

Looking at forward forecasts by companies like Shell, they see a broad expansion of the LNG industry out to 2050, with generally flat natural gas prices untroubled by carbon pricing.

But if this expansion of the LNG industry occurs, it will almost certainly put the world on the path toward 4c temperature rise.

Stated conversely, if the world limits warming to 2c amid an uncontrolled expansion of LNG with all adjustment forced on to other industries

Emission Adjustment Burden On Other Industries to 2030 Of LNG Expansion

If global Liquid Natural Gas (LNG) trade expands in line with industry forecasts at the same time as the world drastically reduces carbon emissions, the LNG trade will account for roughly 30% of global emissions by by 2030.

The first: carbon pricing spurs a financial crisis as huge investments in LNG are prematurely written off. That outcome will mostly affect reckless shareholders in LNG companies. Broader society may largely dodge the bullet.

The good news in this scenario is that clean energy alternatives will be fully competitive by 2030 (likely earlier). What this means is huge writeoffs for exposed industries and their bankers but sparing the larger economy.

The second: uncontrolled global warming that spurs civilizational chaos. The only winners will be the rich and well-connected. Everyone else will have to fend for themselves.

Both outcomes are bad. But the better outcome of the two is a financial crisis caused by carbon pricing. That will cause premature write down of huge LNG capacity, but the effects should be limited to the corporate sector.

Allow strategic bankruptcy and wipe out of shareholders will limit the broader damage to society. Shareholders should have known better.’